A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Sunday, January 12, 2014

Martoma Gets Left Holding The Bag

Matthew Martoma, as capital market players go, seems like a decidedly uninteresting and unsympathetic character. In the early days of his notoriety as part of S.A.C. Capital Advisors, LP ("SAC"), his job was to get an information advantage in the market place that would help his boss make profitable decisions about their pharmaceutical/health care holdings.

Mr. Martoma, who back then sounded like a junior analyst, went to one of the many "expert networks," where individual experts in various specialized areas make themselves available primarily to hedge fund types who are looking for non-public information. These experts receive, in the typical case, hourly consulting fees, for which the network takes a nice chunk for doing little. One of the doctors he found was Dr. Sid Gilman of the University of Michigan, who was a principal investigator on a large-scale clinical study on a compound of interest to one of SAC's portfolio holdings.

So, this physician made himself available on an expert network, and the network advertised his presence and area of expertise. According to the press, Gilman and Martoma had many conversations, and Dr. Gilman was always forthcoming with more information, because the calls and consulting fees continued to mount. Dr. Gilman violated all of the normal codes of conduct of the University of Michigan, where he was employed, as well as his code of conduct as a clinical investigator. He normally would have suffered sanctions from his employer, from the study's sponsor, from the FDA, and the SEC. So far, it looks like he has turned into a stoolie on Mr. Martoma, and he has received a free pass from the Feds. It doesn't seem as if the University of Michigan or the trial sponsors have taken any action against him.

Over time, as Mr. Cohen has paid a large fine, out of the pockets of his investors, and taken a plea while restructuring his business as a family office. He has played the system, and the Feds didn't have the desire nor the gumption to go the full fifteen rounds with him. Dr. Gilman has also played the system, although he should be facing multiple professional and regulatory consequences.

Meanwhile, Mr. Martoma is suddenly, routinely described as a "hedge fund manager," or a "portfolio manager." He was nothing of the kind, given what he spent his time doing and the nature of his conversations with the only manager who really mattered, Mr. Cohen. It seems too late for him to roll on Mr. Cohen.

Mr. Cohen has spun a narrative that Mr. Martoma was a "one trick pony," and he suggested that he was discharged because he didn't provide consistent value to the operation. Never mind that he received a $9.3 million bonus for his sweating our inside information from Dr. Gilman on Wyeth and Elan studies.

There's no way that Mr. Martoma can exonerate himself or come out a winner, because someone has to be sacrificed, as this six year pursuit of SAC is now stale and can't provide incremental career boosts for the lead prosecutors. You can't sweat blood out of a stone, and the SAC story is now just that.

Even if Mr. Martoma were able to supply details of his conversations, the physicians are immune from prosecution and now contend that were lured or tricked into making public information they shouldn't have revealed. Mr. Cohen can use the famous "I have no recollection of any such conversation."

Mr.Martoma seems like a wan, confused, isolated character without any friends in high places. The press are out to add unsavory, and irrelevant details, like his changing his name and now, his doctoring a Harvard Law transcript. Is that relevant to the alleged insider information trades? "In the halls of justice, the only justice is in the halls."